However, Powell has yet to address the elephant in the room: Will US house prices fall?
Fast-forward to this week, and we finally got a better understanding of the central bank’s view on house prices: On Thursday, Fed Governor Christopher Waller told an audience at the University of Kentucky that it’s possible we could see a “material” drop in US home prices.
“While this [housing] the market correction could be quite mild, I can’t rule out the possibility of a much larger drop in demand and house prices before the market normalizes,” Waller told the crowd.
That is the first time that a Fed official acknowledges that housing correction in progress could see home prices fall nationally. Waller also admitted house price correction could end up being more than a small mark down. It could, he says, be a “material [home price] correction.”
Despite the risk of a material correction in home prices, several factors help reduce my concern that such a correction will trigger a wave of mortgage defaults and potentially destabilize the financial system,” Waller said. “One is that due to relatively strict underwriting in the 2010s, mortgage borrowers’ credit scores today are generally higher than they were before the last housing correction. Additionally, the experience of the last correction taught us that most borrowers only default when they experience a negative impact on their income in addition to being underwater on their mortgage.”
Reading between the lines, it looks like Waller is making four points. 1. The housing market correction could be “soft.” 2. There is a scenario in which the correction of the housing market is not slight. 3. A sharp drop in house prices is possible. 4. If a sharp drop in house prices manifests, it would not trigger a wave of foreclosures like the one in 2008 or a financial collapse.
Of course, the Fed’s acknowledgment that home prices could fall comes after, well, home prices in many markets have already started to fall. Among the top 148 regional real estate markets tracked by John Burns Real Estate Consulting98 markets have seen home values fall from their 2022 peaks. In 11 markets, the Burns home value index It’s already down more than 5%.
“Prices have even fallen in some areas of the country, especially those that saw the biggest increases over the past two years. And many builders are reportedly cutting their list prices and offering bigger incentives,” Waller told the Times. crew.
So far, the housing correction, driven by increased mortgage rates— is affecting one of the two markets more strongly.
The first group are high-cost technology centers. That includes markets like San Francisco (down 7.8% from its 2022 peak), San Jose (down 9%) and Seattle (down 6.2%). Not only are its high-end real estate markets more rate-sensitive, but so are its tech sectors.
The other group are bubbling markets like Austin (6.2% less), Boise (5.3% less) and Phoenix (4.4% less). During the Pandemic real estate boomthose bubbling markets saw home prices reach levels well above what local incomes would historically support. According to Moody’s Analytics, Austin and Phoenix are “overvalued” by 61% and 57%, respectively. Historically speaking, significantly “overvalued” housing markets are the most vulnerable to house price cuts during a housing correction.
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